The head of the Abbott government’s financial system inquiry,
David Murray
, could find himself locking horns with the country’s powerful financial services industry if he pushes ahead with controversial new recommendations aimed at improving the standard of financial advice that retirees receive.

Industry participants who have been involved in discussions say that the quality of financial advice in the country’s $1.8 trillion superannuation system is likely to be a major theme of the Murray Inquiry’s interim report, which is expected to be released in July.

According to these industry participants, some members of the Murray Inquiry have expressed concern that there is insufficient training for financial advisers, and that, unlike other industries, the financial advisory ­industry lacks professional bodies that police the educational standards of members, discipline and continuing professional development.

There are also concerns that retirees typically have low levels of financial literacy, which leaves them vulnerable to being taken advantage of by unscrupulous financial advisers.

According to industry participants, the Murray Inquiry is also likely to query whether the Australian Securities and Investments Commission (ASIC) – which is responsible for protecting consumers and investors – has sufficient powers and resources to prosecute financial advisers who offer faulty financial advice.

The Murray Inquiry has held extensive consultations with industry in consumer groups in the lead-up to the release of its interim report. Earlier this month, Mr Murray told an Australian Business Economists lunch that not only had the inquiry received more than 270 submissions, but he personally had attended most of the 100 stakeholder engagements. He added that although consumers were generally satisfied that the regulatory framework was working well, “there are some concerns about disclosure and financial advice and investment".

Examining the equities bias

Bankers who have held discussions with the Murray Inquiry said they expect the interim report will look closely at whether the existing tax ­regulations encourage investors to invest too much of their super savings in equities, rather than in bank deposit-style products.

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The 2009 Henry Review of the Australian tax system recommended that Australia should reconsider its dividend imputation system, pointing out that its benefits had declined as the economy had become more open. It noted that Australia and New Zealand were now the only two OECD economies with imputation systems. In addition, the Henry Review recommended a more favourable tax treatment for income from bank deposits and bonds.

Although the Murray inquiry is not examining the tax system, it is likely to look at whether certain tax concessions result in a distortion in how the country’s super savings are allocated – and whether equities are favoured at the expense of bank deposits.

Given the exponential growth in Australia’s super system, this distortion could have major implications for the overall funding of Australia’s households and businesses.

Although some submissions argued strenuously that the government guarantee of bank deposits of up $250,000 should be wound back, bankers said they expected the Murray Inquiry will take a more pragmatic approach, on the basis that it will be too politically difficult to scrap the emergency measures introduced during the financial crisis. What’s more, they say, the value of the guarantee is eroding over time. However, they said the interim report could recommend that savers should pay a fee for the guarantee.

Other submissions argued that the Australian Prudential Regulation Authority (APRA) – the body charged with regulating the country’s banks, building societies, insurance companies and superannuation funds – has been over-zealous when it comes to applying new global capital rules. But bankers said that the Murray Inquiry appears to have adopted the view that Australian is heavily dependent on attracting foreign capital, and so has no choice but to comply with international regulatory standards.

APRA ‘well regarded’

In addition, bankers say that the Murray Inquiry’s interim report is also likely to highlight the huge growth of savings within the Asian region, and to look at ways Australia can be more closely intertwined into the region’s financial markets. In this respect, Australia’s reputation for having a robust regulatory structure is likely to be considered an advantage.

As Mr Murray told the ABE lunch in May, “if you work in a bank, you might think APRA is too intrusive. But one of the reasons for that is there are some pretty heavy thinking people in APRA . . . In business generally, we are very, very well regarded. Our rule of law, quality of regulation, quality of our institutions make us extraordinarily well-regarded in Asia."

Some financial sector participants are worried that the Murray Inquiry could examine the growing volume of academic research which argues that banks should be forced to hold much higher levels of capital to ensure that taxpayers are not saddled with the cost of bailing them out if they fail.

Earlier this month, Switzerland’s financial regulator laid out new rules that could force the country’s two ­biggest banks to hold more than double the total capital required by ­international standards. The provisional rules published by regulator Finma would require UBS to hold total capital worth 19.2 per cent of its risk-weighted capital by 2019, while Credit Suisse would have to meet a 16.7 per cent ratio (under the global Basel III accord, only 8 per cent is required).

But bankers told The Australian Financial Review that Mr Murray is likely to be very cautious about requiring banks to substantially boost their capital buffers because this would push up funding costs for Australian households and businesses.